The archived blog of the Project On Government Oversight (POGO).

Aug 23, 2012

Inspector General Finds Contractors, Government Both Responsible for Small Biz Contracting Violations at VA

By NEIL GORDON

A new report by the
Department of Veterans Affairs Office of Inspector General (IG) has found
another large business improperly benefited from federal small business
contracts. The offender this time is Health
Net, ranked 221 in the most recent Fortune
500 with $11.9 billion in revenue last year.

According to the IG, Health Net “encouraged” a former senior
VA official to set up a company called Enterprise
Technology Solutions (ETS) that would be eligible for service-disabled
veteran-owned small business (SDVOSB) contracts. (The size limitation for an
SDVOSB is $7 million in annual revenue.) ETS won three such contracts with the
VA, and two other contracts were awarded to another SDVOSB (owned by a former
Health Net employee) which ETS acquired in 2009. The five contracts had a total
value of $82 million between 2009 and 2011.

The IG found that ETS subcontracted all of the work to
Health Net. The contracts required the prime contractor to perform at least 51
percent of the work, but according to the IG, ETS “did not perform any work
under the contracts, much less a minimum of 51 percent of the tasks required by
the contracts.” The majority of the contract revenues ultimately went to Health
Net, leading the IG to conclude that ETS’s sole function was to use its SDVOSB
status to benefit Health Net – in other words, to act as a “pass-through”.
In addition, the IG also determined that ETS and Health Net failed to deliver the
expected cost
savings on the contracts.

The IG recommended terminating the five ETS contracts and
referred ETS to the VA’s suspension and debarment office. The IG did not
recommend any actions against Health Net.

As POGO takes great pains to point
out, the contractors themselves aren’t entirely to blame for misconduct in
federal small business contracting. In this instance, the IG found that VA personnel
responsible for administering the contracts were fully aware that Health Net,
not ETS, was performing all of the work. The VA also did not properly justify
its decision to award the contracts as SDVOSB set-asides rather than through
full and open competition. As illustrated above, there was unquestionably a
less-than-arm’s-length relationship between the VA, Health Net, and ETS. This
kind of conflict of interest may occur more than we realize at the VA because,
as the IG informs us, this is the third report in recent years identifying
improper sole-source contracting at the VA involving former VA employees who formed
or worked for SDVOSBs. (Those other reports, in case you’re interested, are
posted here
and here.)

Neil Gordon is an investigator for the Project On Government Oversight.